A New Force in International Development: Why did China propose to establish the Asian Infrastructure Investment Bank?

By HU Tao, LU Xuege, ZHU Li

In November this year, China will likely launch the Asian Infrastructure Investment Bank (AIIB) when leaders in the Asia Pacific region meet at this year’s APEC summit in Beijing.

Chinese President Xi Jinping first unveiled the AIIB plan during his visit to Indonesia in October last year. Since then, China has held five rounds of consultations with countries in the region and successfully recruited 21 founding members. Mr. Jin Liqun, the Former Finance Minister of China and Vice President of ADB, is to be appointed as first President of AIIB, according to the proposal of Chinese Government.

With AIIB, China, now almost the worlds’ largest economy by purchasing power, aims to “promote interconnectivity and economic integration in the region”. It is also seen by some as an effort by China to harness its vast financial resources and infrastructural expertise to expand its regional influence. So what’s behind this new initiative?

Why?

There are many reasons of course. A primary one is that China’s rising economic and financial strengths call for a corresponding power increase reflected in major multilateral development banks and international financial agencies. However, the current capital shares and voting rights for China as well as other BRICS countries are disproportionately low in the International Monetary Fund (IMF) and the World Bank Group (Figure 1).

IMF-World Bank Group

In contrast, the AIIB as well as BRICK Development Bank will provide an alternative avenue for China and other emerging economies to have a bigger say in financing infrastructure in the region. In addition, the new capital made available by AIIB will provide much needed investment in the region where infrastructure development needs remain extraordinarily high.

Other considerations?

Besides seeking stronger influence that matches its rising economic power, China has other financial, economic and geopolitical considerations for creating the AIIB.

First, China’s pursuit of the internationalization of its currency RMB will greatly benefit from the AIIB. Given that China and the ASEAN are looking to double their two-way trade by 2020, settling accounts through RMB under AIIB would substantially elevate China’s financial status in the global currency market.

Economically there is also the growing need for China to tap into the markets overseas. Equipped with formidable experience and technology in infrastructure development it has accumulated in recent years, China is on the lookout to invest heavily in transportation and infrastructure construction in the region, such as highways, railroads, sea ports, and airports. For example, in October 2013, China expressed its interest to participate in the high-speed rail project in Thailand. This is just the tip of the iceberg.

In addition, China and the ASEAN have also agreed to promote further economic cooperation in a wide range of sectors, from civil aviation, maritime development, environment protection, to agriculture, information technology, human resources development, and tourism. AIIB will no doubt provide the indispensable financing to strengthen such bilateral economic ties.

From a geopolitical perspective, to establish such a bank is also strategically significant to enhance the China–ASEAN Free Trade Area and China’s relationship with the ASEAN members.

Why Asia?

It is in China’s interests to set its sights on Asia. Many Asian countries, though keen on driving economic growth through inbound foreign direct investment, are faced with the almost insurmountable challenges of securing funding from traditional multinational development banks and bilateral funds, which are often known to be slow, inefficient and insistent on additional conditions. AIIB, as a result, might provide an alternative option for these countries. For members of the ASEAN, having one more investment player to bid for their projects means lower financial risks and more negotiation power, hence a better chance of getting a more favorable deal. China, with an immense foreign exchange reserve at its command, has the means and confidence to go head to head with big players like Japan and its finance arm Japan Bank for International Cooperation (JBIC).

In a broader context, this is consistent with China’s strategy to increase its regional influence incrementally. Such efforts began with the Shanghai Cooperation Organization Development Bank, proposed in 2010 to strengthen China’s economic ties with the rest of the Eurasian nations. AIIB is a further step in this direction with a focus on Lower Mekong countries. Why infrastructure?

Despite substantial growth in recent years, the ASEAN countries still faces challenges to overcome their infrastructure deficit and bottleneck. According to the Asian Development Bank, Asia needs to invest about $8 trillion in national infrastructure and $290 billion in regional infrastructure between 2010 and 2020 to sustain its growth trajectory. It is against this backdrop that AIIB, as a new multinational financial institution that answers the infrastructure needs of the region, rises to the occasion.

Our concerns

With the creation of AIIB, we have reason to believe that the infrastructure development in the region will be markedly sped up. While this greatly improves the physical interconnectivity between countries and facilitates trade flows across national borders, it will also pose mounting challenges for biodiversity conservation in the region. For example, large scale infrastructure will further encroach into natural habitats, intensify the human interference on wildlife, and aggravate wildlife trafficking, to name a few. How to encourage the AIIB to incorporate credible environmental safeguards into its lending policies presents both a challenge and an opportunity for WWF and its conservation partners.

1) http://www.channelnewsasia.com/news/business/china-proposes-setting-up/835722.html
2) http://www.economist.com/blogs/analects/2013/10/asian-infrastructure-bank-1
3) IFC, IBRD, IDA, MIGA are members of the World Bank Group.

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